Obama: ‘No difference between capitalism and communism’

Hard to know what is more shocking: A president of the United States stating in a Buenos Aires speech last week that there is “no difference between capitalism and communism, choose whatever works” (see video link in the endnote) or the fact that this statement has not received coverage.

How can a president of the US get it so wrong? And just 30 years after communism fell? Or without so much of correcting himself saying: “Though remember, Germans believed that fascism worked for the German tribe for a while, and communism had its Gulags and starved millions, and don’t forget all the people who disappeared under Latin American dictatorships, communist or other, or radical Islamism, for that matter. So perhaps I misspoke.” No, there is no such correction in his speech. Obama’s statements make Bernie Sanders success and repeated call for “revolution” before screeching crowds more comprehensible. The lack of outcry is actually deafening.

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President Obama and Argentinian President Macri in Buenos Aires

The last time political leaders were this confused was after WWI and during the 1930s: People were uncertain about the model of society they should emulate, as none of the countries then set clear example worth striving for. The fact that the sad state of affairs had to do with compounding domestic and international mistakes that actually violated principles of “capitalism,” or of “democratized capital markets,” (as I much prefer defining the main feature of this “ism,”) disappeared from sights and most minds. The result was that people ended up betting on devastating ideas, disastrous political systems, with long term consequences – communism being just one of them.

Recall the 1920s and 1930s: Hyperinflation in Germany, Hungary, Austria, and Italy destroyed their middle classes and financial markets, consequence, in part, of the devastating Versailles treaty imposing onerous debts. With financial markets in shambles and people’s savings eroded to nothing, governments and central banks became the main, often unaccountable, financial intermediaries – and that means having much increased powers in their hands.

Austria, following the large credit expansion during and after WWI, and later the collapse of its largest deposit bank, Credit Anstalt, became insolvent. Though Austria first kept the schilling linked to gold, investors realized that this could not last, and capital left the country, and in 1931 the schilling was delinked from gold. These events precipitated the United Kingdom’s own exit from the gold standard in that same year, after it mistakenly relinked the pound to gold in 1925 at the pre-WWI level, in spite of the high inflation the UK experienced during the war. This resulted in predictable deflation and high unemployment. As a result, neither Austria, nor UK “capitalism” appeared worth emulating.

France learned from the United Kingdom’s 1925 mistake. Raymond Poincaré, French premier in 1926, stabilized the franc at the proper level (at roughly in the ballpark fraction of pre-WWI level), capital flowed back to France, credit expanded, and France boomed without inflation or unemployment. A model to emulate, it would seem. But the UK perceived French monetary policy as “competitive devaluation,” and the disagreement quickly destabilized the brief international monetary calm. By 1928, the short-lived international cooperation Benjamin Strong, head of the Fed at the time, engineered with parts of Europe, fell apart. From then on, the mazes of monetary and political errors compounded rapidly ending in Europe’s devastating political bets that led to WWII.

This post-WWI sequence of events: Russia betting on “communism,”; Western Europe on a range of mistaken fiscal and monetary policies and bad international treaties; the US doing its own share after 1929 with the market crash and unemployment in the 20-30 percent levels – all ending with the middle class falling far behind and the destruction of “democratized capital markets” preventing them from rising, destroyed all visibility what model of society should Europe and the rest of the world strive for.

With savings and access to financial markets thus evaporating, people turned to the two remaining “institutions” for accessing capital: government and “crime” – the latter in a broader sense of the word, referring to wars too, on both “foreigners” and citizens redefined as foreigners too in particular (“Jews,” that is). People always seek rationalizations for the new trends, increased roles for government, central banks and military in this case. “Intellectuals” are always ready on politicians’ shelves to offer promptly such rationalizations. Thus predictably, the 1920s and 1930s also saw socialism and communism rationalizing governments’ expanded roles in some countries. In others, theories about public works and, eventually, the Keynesian framework rationalized the permanent increases in governments’ and central banks’ roles, raising and allocating capital.

Yet closer inspection of these events does not lead to Obama’s “capitalism-communism-whatever” view of the world. Rather, the sequence of events shows how important it is to put obstacles in place so governments and central banks cannot centralize too much power, become unaccountable. The historical reminders also show how important international agreements are, those sustaining stable exchange rates in particular.

This should not surprise: prosperity happens when talents are matched with capital, holding all parties accountable: the talent, the capital, and the matchmakers. This is easier said than done – building and sustaining the layers of institutions to keep matchmakers accountable, in particular.

Every society, no matter where or when, has five sources of capital: inheritance/resources; savings; access to financial markets; government; and, last but not least, “crime,” through military power in particular. After WWI, the series of monetary blunders and lack of international cooperation decimated people’s savings and the Versailles Treaty kept resources captive. These events destroyed capital markets and international trade, and the fact that restoring stable currencies was a requirement for trade to be restored faster, got forgotten in the confusing state of affairs.

What about today?

Societies are as uncertain now about which model of society to strive for and how to repair the global monetary systems as they were after WWI. Surprisingly, the president of the US is (mis-)leading the way, even though the US has the longest experience with “democratized financial markets.” True, a series of grave political and regulatory mistakes combined with lack of accountability in the financial sector brought about the recent subprime-induced crisis.

But how can anyone compare the – no doubt – huge costs of this crisis with the impact of communism in Russia or China, with millions killed or condemned to Gulags, and millions starved and millions others forced into death marches? And by a person with pretension to being a “constitutional scholar” too, having gone through Columbia, Harvard and lecturing at University of Chicago law school on, according to colleagues, “Constitution, race and gender”?

By equating “capitalism” with “communism” it does not appear that Mr. Obama grasped the essence of the US constitution – namely, dispersion of powers.

Without such dispersion – that only access to independent sources of capital offer, votes and beautifully written constitutions are little more than pieces of paper – as his Latin American audience can attest.

The 1920s and 1930s offer warnings to them, and even to the US, with a president this ignorant and confused.